Russell Taylor on 150 years of investment trusts

Russell Taylor on 150 years of investment trusts

The Economist was not too sure about one particular stockmarket launch back in 1868. This was a new company raising a little over £500,000 for a new concept. 

The idea is very good, opined the magazine, but the shape is very peculiar, and the exact idea upon which it starts has never been used before.

Victorian values today

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Foreign & Colonial (F&C) – for it was this investment trust the magazine was describing – intended to pool British investors’ money to invest in risky assets, not British government bonds then yielding 3.3 per cent, but a selection of empire and British-influenced foreign country bonds offering a combined yield of more than 6 per cent.

Early investors had no cause to complain: over the next 150 years, the investment trust produced a compound annual return of 8.1 per cent.

Of course, the managers had to be aware of changing conditions. These included rising economic competition from the US and Germany, two savage and destructive world wars, the appearance of inflation and its effect on bond yields (and values), and the end of the empire and British power. 

From the 1920s onwards, F&C began to invest in equities. The investment company has now increased its dividend every year for the past 47 years, and has more recently begun to invest in “private equity” opportunities. It charges a modest 0.37 per cent annual fee. 

But this is not the only ‘dividend hero’, as the Association of Investment Companies (AIC) calls those portfolios that have raised payouts for 20 consecutive years or more, and several have done even better than F&C. 

Adjusting to the future

Not surprisingly, investment trusts were a great success until after the second world war. At that point, unit trusts were reintroduced as a means of pooling assets within the British economy, and these were much more profitable for investment managers than their predecessors. 

And the public forgot the advantages of investment companies, until the rocketing costs of investment management and poor stockmarket returns began to tarnish the heavily promoted advantages of unit trusts.

Treasury restrictions meant that investment trusts and insurance companies were the only types of asset managers allowed to invest internationally until sterling convertibility in 1989. 

But they languished, often trading at considerable discounts to their asset value, and all too soon were gobbled up by manufacturing companies keen to buy international assets on the cheap. 

As the industry celebrates 150 years since the launch of F&C, new research has revealed the extent to which the survivors have flourished. The average investment company has outperformed the FTSE All-Share and MSCI World indices, and the average open-ended fund, over 30 years to the end of March 2018. The average investment company has returned 1,955 per cent, equivalent to a £100 lump sum becoming an impressive £2,055. 

By way of comparison, the FTSE All-Share gained 1,196 per cent (or £1,296), the MSCI World produced 944 per cent (or £1,044), and the average open-ended strategy returned just 919 per cent or (£1,019) ,